ETF Investing for Beginners: Choosing the Right ETFs

If you’re just getting into investing and want to keep it simple, many experts recommend exchange-traded funds (ETFs). 

However, with numerous ETFs on the market, it can be tough to figure out what differentiates them. And if you’re building a portfolio from scratch, then choosing the right ETFs can make or break your nest egg.

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ETFs and Your Investment Strategy

An exchange-traded fund (ETF) is like a basket of different securities. Choosing the right ETF depends on what you’re trying to achieve with your portfolio and what else you’re invested in. 

For example, someone who is only five years away from retirement likely has a drastically different goal than someone who is 35 years away from retirement. 

Your strategy should be personalized, not general.

Also, the ETFs you choose need to be considered relative to each other. For example, if you’re choosing an index ETF when you already buy shares in an index mutual fund, you may be duplicating your investments. 

Your portfolio should be appropriately diversified, which usually means having several different kinds of ETFs or mutual funds.

A popular strategy is to choose a mix of three types of ETFs: 

• A total stock market fund
• A bond fund 
• An international fund 

A mix of ETFs that fit these characteristics can help create a diversified portfolio that will withstand most market swings.

You can buy ETFs through a trading app like Webull. Even if you're a beginner investor, Webull is user-friendly and comes with lots of educational tools to help you along your investing journey.

READ MORE: Webull Review: How It Compares for Beginner Investors

Types of ETFs

Which ETFs you choose depends on your risk tolerance, time horizon (how long you have to earn returns), and investment goals.

No two people will have the exact same investment strategy, so mix and match to what you’re most comfortable with.

Growth ETFs

If you have aggressive investing goals, look for equity-based ETFs that include companies that are rapidly expanding or have the potential for high growth.

These ETFs have more volatility, so be sure to know your risk tolerance, and diversify with some more stable investments as well.

READ MORE: What Is Growth Investing and How Do You Pick Growth Stocks?

Value ETFs

Value ETFs are often made up of large, well-known companies with long track records. These ETFs may still provide growth, but they will usually sacrifice some growth for stability. 

These companies may also be less innovative, which can account for lower returns than what is seen with other equity ETFs.

READ MORE: What Is Value Investing?

Bond ETFs

Bond ETFs are a good choice if you want capital preservation — meaning you’re (mostly) guaranteed to get back at least what you put in. 

While bond ETFs won’t provide the returns that an equity ETF will, they may offer more security. 

The ideal percentage split between bond and stock ETFs will depend on your current age, desired retirement age, and risk tolerance. 

Corporate bond ETFs

A corporate bond ETF is full of bonds that are sold by companies. 

Many bond funds contain bonds that are sold by municipalities or governments, whereas a corporate bond is focused on corporations that sell bonds to raise money for their own projects.

International ETFs

Many investors want to invest in companies outside of the U.S. to diversify. 

There are multiple types of international ETFs — for example, you can choose international ETFs that focus on emerging markets. 

You can also pick international ETFs with countries that are as economically developed as the U.S. It all depends on your risk tolerance and goals.

Broad equity ETFs

A broad equity ETF will provide more exposure to a wide range of stocks. 

There may be thousands of stocks in a broad equity ETF, which can offer more upside growth potential than other types of equity ETFs.

Tech ETFs

Just like the name suggests, a tech ETF will include tech companies. If you believe in the future of technology, purchasing a tech ETF can give you exposure to a variety of those companies.

ESG ETFs

If you’re worried about social and sustainability issues, you can choose an ETF that prioritizes those factors instead of overall profit. 

ESG (environmental, social, governance) ETFs may eschew companies that promote things like fracking, weapons, tobacco, and gambling.

Because ESG ETFs are relatively new, It's hard to gauge how they will perform compared to regular ETFs. 

Also, you should still look at the underlying makeup of the ETF — you may find some companies that make you ethically uncomfortable.

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What To Look for in ETFs

Once you’ve narrowed down the types of ETFs you’re interested in, you’ll want to look at the details of each one.

Consider how it’s structured and managed, whether there are any fees, and how it’s performed in the past.

Underlying structure

Before buying an ETF, you should investigate what the ETF is made up of. 

You can do this on sites like Yahoo! Finance, Marketwatch or Morningstar. The fund’s own website should also show what companies or assets are included.

For example, the IWF ETF is a Russell 1000 index fund, meaning that it tracks the Russell 1000 index, whereas the iShares Core S&P Mid-Cap ETF (IJH) only tracks mid-capitalization S&P 500 companies. 

Outside of index funds, ETFs can have a more complex strategy. For example, the Vanguard FTSE Developed Markets ETF (VEA) tracks an index made up of major international companies that have a large global presence.

READ MORE: How to Manage Your Own Investment Portfolio

Cost

Each ETF will have an expense ratio, which is its internal fee. These fees tend to cost less than 1%, with many less than 0.05%, depending on the provider and type of ETF. 

A basic rule is to choose an ETF with a low expense ratio — since obviously that will leave more money for you!

Some people assume that ETFs with higher expense ratios are worth the cost because they provide higher returns. But that’s not necessarily true. In fact, actively managed funds with higher fees often have the same or lower returns as funds that simply track the index.

But don’t get too hung up on tiny differences in fees. For example, if you’re trying to pick between two ETFs, one with a 0.05% expense ratio and another with a 0.045% expense ratio, there’s no reason to split hairs and agonize over your choice. 

READ MORE: Active vs. Passive Investing: Which Is Best?

Past performance

You can see the past performance of an ETF from as recently as one day ago back to the fund’s inception.

You should also compare the ETF’s past performance to its benchmark or what it’s trying to replicate. For example, an S&P 500 index ETF should have similar results to the actual S&P 500 index. 

However, if you’re comparing a bond ETF to an S&P 500 index, the bond ETF will likely have lower returns. This doesn’t mean that you shouldn’t invest in the bond fund. It simply means you need to understand how the bond ETF fits in your portfolio.

Also, while comparing past performance can be helpful, it can also be a distraction. Remember, past performance is never a guarantee of future performance.

READ MORE: Benefits of ETFs

TL;DR

ETFs are a bundle of different stocks, bonds, or other assets. There are tons of different types, and choosing the right one for you depends on your risk tolerance and investment goals. 

For example, if you’re an aggressive investor, you may want to buy tech and growth ETFs. If you’re more conservative, you may want value ETFs. And if you’re worried about investing in unethical companies, you may want to look for ESG ETFs.

When you’re choosing an ETF, consider factors like its structure, past performance, and how much it will cost you.

And for more investing lessons, check out these episodes of the Erika Taught Me podcast:

• How To Invest for Beginners (Step by Step)
• Money & Investing Pitfalls to Avoid
• Investing in the Stock Market Explained: A Guide For Beginners

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